Trade of the Day: Trap Door About to Open Under AMZN Stock?

A break below important support could result in a mean-reversion move lower

Amazon.com, Inc. (AMZN) — Shares of this online retailing giant were up as much as 87% at their year-to-date high in late July as fund managers and traders were forced to chase after the few believable single-stock growth stories out there.

But the most recent rally in AMZN stock, which came after the company’s better-than-expected earnings report, looks to have exhausted the bulls and could now offer active investors and traders a short-side trade to profit from a mean-reversion move to the downside.

On July 23, the company reported 20% year-over-year quarterly revenue growth despite headwinds from a strong U.S. dollar, along with a surprise profit of $0.19 per share. The bulls took AMZN stock vertical, with it gapping up 20% the following day. Shares gave up a good portion of those gains intraday, however, leaving behind a candle with a bearish tail on the daily chart, which signaled buyer exhaustion.

Below we see the post-earnings rally also marked the weekly chart with a bearish candle that begs for at least some consolidation in AMZN stock before a better upside move. And from a momentum perspective, the relative strength index (RSI) has also been pushed to extreme overbought readings.

Moving on to the daily chart, AMZN stock sits on a defined line of support. A break below it would be like a trap door opening to send shares to the $490 area, which is the bottom of the post-earnings up gap. Look to sell AMZN stock short once it holds below the $518 mark for a move toward $490.